Wholesale shipments of motorhomes were down 17% in August 2011 vs the prior year, and total RV shipments (which includes motorhomes + towables) were down 2%. Obviously, the motorhomes are a much bigger revenue/profit item for the manufacturers. It looks like we have seen a substitution effect into the inferior/cheaper RV good, due to consumer weakness.
Press release - WINNEBAGO INDUSTRIES REPORTS RESULTS FOR THIRD QUARTER FISCAL 2011:
Consolidated revenues for the third quarter of Fiscal 2011 ended May 28, 2011 were $135.6 million , an increase of 0.6% percent, versus $ 134.8 million for the third quarter of Fiscal 2010. [...] Net income for the third quarter of Fiscal 2011 was $1.2 million versus net income of $6.0 million for the third quarter of Fiscal 2010 . On a diluted per share basis, the Company had net income of $0.04 for the third quarter of Fiscal 2011 versus net income of $0.21 for the third quarter of Fiscal 2010. [...]You heard it here first.
The third quarter of Fiscal 2011 as compared to the third quarter of Fiscal 2010 was negatively impacted by last-in, first-out (LIFO) inventory expense as opposed to LIFO income in the prior year, commodity inflation, an impairment charge on an asset held for sale, as well as increased discounts, repurchase exposure and legal costs. [...]
"The retail market for motor homes softened during our third Fiscal quarter, adding to our disappointment with the level of industry retail sales thus far in Calendar 2011 compared with the prior year," said Winnebago Industries' Chairman and CEO Bob Olson. "While discouraging, it is understandable in the context of new job creation slowing in America, along with reports of falling home prices, declining auto sales, weaker consumer spending, the concern over rising fuel prices and the impact these issues are currently having on the stock market. We remain concerned the current recovery appears to be slowing."
This is something I wrote about Winnebago in November 2010:
A share of stock is different than an ounce of gold or a barrel of oil. The value of a company's equity is the net present value of future cash flows. The only way that inflation can increase the net present value of these future cash flows is to either (a) lower the discount rate by which the cash flows are discounted (i.e. raise the price-to-earnings multiple) or (b) increase those future cash flows. So, does inflation have either of those effects?
Inflation definitely does not raise earnings multiples. Since 1946, inflation rates higher than 5% have always corresponded to a lower range of earnings multiples. This makes sense intuitively, because why would you invest in equities unless they had a
higher earnings yield than the rate of return you could earn owning a basket of commodities?
The other possibility is that inflation results in increased earnings. Is it likely that Winnebago will have higher earnings in an environment of higher inflation? Their business model has high fixed costs (operational leverage), and a key profit driver for them would be to increase sales.
The 2010 Winnebago Tour has a base price starting at $274,554 (does not include tax, title, delivery charges, or optional features). How enthusiastic for expensive gas guzzlers will our beleaguered middle class be when diesel fuel costs close to $5 per gallon, as it did in mid-2008? And, in fact, the share price of Winnebago was crushed during the crude oil price spike during that summer.
I mentioned our Winnebago short on Thursday - here are the details from the earnings release:
Revenues for the second quarter of Fiscal 2011 ended February 26, 2011 were $106.6 million, a decrease of 3.6 percent, versus $110.5 million for the second quarter of Fiscal 2010. The Company reported an operating profit of $4.1 million for the quarter, versus an operating loss of $1.9 million for the second quarter of Fiscal 2010.Problems: increasing dealer inventory and falling backlog are not a good sign. Also, the company used to report a metric called "Retail Registrations", but it does not appear to be in the earnings release this time.
Winnebago Industries' dealer inventory increased 7.8 percent compared to the end of the second quarter of Fiscal 2010, with 2,179 of the Company's Class A, B and C motor homes on dealers' lots at the end of the second quarter of Fiscal 2011. [W]innebago Industries' sales order backlog was 957 Class A, B and C motor homes at the end of the second quarter of Fiscal 2011, a decrease of 17.4 percent compared to the end of the second quarter of Fiscal 2010...
Winnebago (WGO) is our largest short position - I added after hours yesterday after the explosion in the yen carry trade.
The stock is tanking this morning (down 9%) after another disappointing earnings report. I am taking the opportunity to cover some and redeploy capital to other shorts that are up today.
"Cramer likes WGO as an 'aggressive,' speculative play on a turn around in the U.S. economy"
Come on, people. Cramer liked Downey Financial, too, and he suggested that WaMu should buy DSL for $100 per share. Oops! Both went to zero!
The blue line is the ratio of "Retail Registrations" of Winnebago product (actual purchases by end users) to "Wholesale Deliveries" of product (shipments to dealers). I am calling this the Retail/Wholesale Delivery (RSD) ratio.
Besides the obvious problems with the Winnebago (WGO) business model and valuation, there are two other sticky wickets that people should be thinking about: the defined benefit obligations and the repurchase commitments. I will give some notes on each of them, below.
Postretirement health care
Winnebago provides certain health care and other benefits for retired employees hired before April 1, 2001, who have fulfilled eligibility requirements of age 55 with 15 years of continuous service. Retirees are required to pay a monthly premium for medical coverage based on years of service at retirement and then current age.
The total postretirement health care and deferred compensation benefit obligations were $79 million at the end of the most recent quarter. This is actually the biggest liability on their balance sheet. Importantly, this liability is an estimate, based on a projection of health care costs many years into the future. How would you like to be short baby boomer health care costs?
Repurchase Commitments
Most Winnebago dealers' inventory is financed on a "floorplan" basis under which a bank or finance company lends the dealer all, or substantially all, of the purchase price. Winnebago enters into repurchase agreements with these lending institutions, which provide that, in the event of default by the dealer on the agreement to pay the lending institution, Winnebago will repurchase the inventory. Winnebago's contingent liability on these repurchase agreements was approximately $170.3 million at November 27, 2010. [The aggregate contingent liability related to our repurchase agreements represents all financed dealer inventory at the period reporting date subject to a repurchase agreement, net of the greater of periodic reductions per the agreement or dealer principal payments.]
[Also, some states have laws that would require Winnebago to repurchase inventory if a dealership exited the business. Incremental repurchase exposure beyond existing repurchase agreements, totaled $6.8 million at November 27, 2010.]
Winnebago establishes a loss reserve for these repurchase commitments, although it assumes that any liability is "reduced by the potential resale value of any products that are subject to repurchase and is spread over numerous dealers and lenders." Thus, the accrued loss on repurchases was $964,000 as of November 27, 2010.
There is a common conceit among investors and pundits that inflation is good for stock prices. This manifests itself in arguments about how monetary stimulus will result in "more money chasing the same amount of stocks," the idea being that all equities everywhere will rise in price in direct proportion to the size of any inflation program undertaken by the Federal Reserve.
A share of stock in a company is different than an ounce of gold or a barrel of oil. The value of a share of stock is the net present value of its future cash flows. The only way for inflation to increase the value of a share of stock is to either (a) lower the discount rate by which the future earnings are discounted (i.e. raise the earnings multiple) or (b) increase the future cash flows (earnings).
Can we say, empirically, that inflation has either of those effects?
Inflation definitely does not raise earnings multiples. See this excellent scatter plot showing that, since 1946, inflation rates higher than 5% correspond to a lower range of earnings multiples. This makes sense intuitively, because why would you invest in equities unless they had a higher earnings yield than the rate of return you could earn owning a basket of commodities?
What about the companies in the Credit Bubble Stocks short portfolio? Will it increase their earnings?
Let's look at Winnebago (WGO). One key feature of its business model is high fixed costs (operational leverage). A key profit driver for them would be to increase sales.
Yet the 2010 Winnebago Tour has a base MSRP starting at $274,554 (does not include tax, title, license, delivery charges or optional features). I actually could not determine from Winnebago's website what gas mileage its 400-hp. Cummins® diesel engine gets, but I suspect it is under 10 miles per gallon.
How enthusiastic for expensive gas guzzlers will our beleaguered middle class be when diesel fuel costs close to $5 per gallon, like in mid-2008? In fact, you can see that the share price of WGO was getting crushed during the summer of 2008 while crude oil (USO) was screaming higher.
On the other hand, some companies' earnings can expect to benefit from inflation. For example, the earnings of an oil & gas exploration and production company are highly leveraged to the prices of oil and natural gas.
This is true of any resource extraction company. The gold miners in the Market Vectors Gold Miners ETF (GDX) will have higher earnings to the extent that inflation or investors' attempts to hedge against inflation cause the price of gold to continue rising.
The companies in the GDX trade at much higher cash flow and earnings multiples than independent oil & gas exploration and production companies. So it would seem that oil & gas is the place to search for cheap inflation hedges. That is what I am doing.
It's hard to imagine a scenario where a little exploration & production company that trades at two times EBITDA wouldn't outperform the chronically unprofitable companies in the Credit Bubble Stocks short portfolio.
This has not been a good earnings season for companies in the Credit Bubble Stocks short portfolio: so far MGM, HOG, WGO and GBE have all disappointed.
Still on deck: USG Corp (USG) on 20-Oct-10.
Sold the MGM and WGO puts that have come deep in the money.
Still have lots of otm puts on MGM WGO PCY STD and GE. Also straight short small amounts HOG and REG.
Looking at VOD calls as a play for a bounce.
A nice down day in the short portfolio. Buying back some of the MGM, WGO, and REG that I sold earlier in the week.
As predicted last night, there is a huge rally and call buying returned to pretty high levels at the open this morning.
There is a "bailout" of European sovereign debt by European central banks. Really, they are moving money from the left pocket to the right pocket and calling themselves richer. Yet that action is believed to make all the world's overpriced risk assets more valuable.
The idea that EuroTARP makes the equity in Winnebago or MGM Mirage more valuable is absurd, yet that is what people believe.
The odds favor betting against people with moronic beliefs. Sold to them!
This morning some of my limit orders to buy puts got filled:
MGM Sept 10 10 @ $1
MGM Sept 10 11 @ $1.24
MGM Sept 10 13 @ $2
WGO Jul 10 12.5 @ $0.60
WGO Oct 10 12.5 @ $1
For weeks I warned about the manic sentiment and unprecedentedly high levels of call buying. I was starting to sound like a broken record. During that time I built short positions.
The S&P 500 subsequently fell 100 points and we are seeing equity put buying at parity with call buying.
I had some limit orders to cover shorts that got set off on this morning's dip, with the result that I covered some REG, WGO, and MGM. Also some of my Treasuries calls sold.
The market is struggling here in the afternoon even though call buying has picked up again. If we get a selloff anytime the rest of the day, it will be an easy decision to cover a bunch more shorts.
I am mostly hiding out in capital structure arbitrage while I wait for this absolutely insane market to crack.
The intraday put call ratio is at manic levels still, and has gone well below 0.4 a couple times today!
I have a few small short positions, like Winnebago (WGO) and there is no justification for the strength in these names.
FOREST CITY, IOWA, April 14 (Reuters) - The top executive at U.S. motor home maker Winnebago Industries Inc (WGO.N) said the encouraging sales rebound his company has seen over the past four months was a function of dealer restocking, not real end demand, and that he was still waiting for retail customers to return to the market.
In an exclusive interview on Wednesday inside the company's 2.5 million square foot factory complex, Bob Olson, Winnebago's chairman, president and chief executive, also provided a glimpse into his company's desperate effort to respond to the sharp downturn in demand that began a little over two years ago, saying the managers were repeatedly outrun by the deteriorating market as they tried to respond.
Added a Blockbuster (BBI) short and a Winnebago (WGO) short. Will have more to come on these...
It's not too late to vote in the Credit Bubble Stocks poll about what kinds of posts you prefer.
Only a single digit percentage of daily readership voted. By an overwhelming majority, those voters wanted actionable trade ideas. Specifically, "long analytical posts about trade ideas."
People seem to like it when I cover a situation exhaustively, as I did with Downey Financial, Standard Pacific, and now Georgia Gulf.
So, I will try to deliver more of that type of content. It has been helpful to have more active commenters, giving feedback on ideas.
I will tell you about the two names I am researching now: Realty Income (O) as a potential pair trade and Winnebago (WGO) as a short. More to come on those.
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